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Iron Mountain Inc (NYSE:IRM)
Q2 2019 Earnings Call
Aug 1, 2019, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and welcome to the Iron Mountain Second Quarter 2019 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded.

I would now like to turn the conference over to Greer Aviv, Senior Vice President of Investor Relations. Please go ahead.

Greer Aviv -- Senior Vice President, Investor Relations

Thank you, Kate. Good morning and welcome to our second quarter 2019 earnings conference call. The user controlled slides that we will be referring to in today's prepared remarks are available on our Investor Relations website along with the link to today's webcast, the earnings press release and the full supplemental financial information.

On today's call, we'll hear from Bill Meaney, Iron Mountain, President and CEO, who will discuss second quarter performance and progress toward our strategic plan; followed by Stuart Brown, our CFO, who will cover additional financial results and our outlook for the remainder of the year. After our prepared remarks, we'll open up the lines for Q&A.

Referring now to Slide Two of the presentation, today's earnings call, slide presentation and supplemental financial information will contain forward-looking statements, most notably our outlook for 2019 financial and operating performance. All forward-looking statements are subject to risks and uncertainties. Please refer to today's press release, earnings call presentation, supplemental financial report, the Safe Harbor language on this slide and our Annual Report on Form 10-K for a discussion of the major risk factors that could cause our actual results to differ from those in our forward-looking statements.

In addition, we use several non-GAAP measures, when presenting our financial results and the reconciliations to these measures as required by Reg G are included in the supplemental financial information.

With that Bill, would you please begin.

William Meaney -- President and Chief Executive Officer

Thank you Greer, and thank you all for taking time to join us. We are very pleased with the continued durable revenue growth across our businesses in the improved operational execution in line with our previous outlook. Some of the highlights of the quarter included total organic storage revenue growth of 2.4% and total storage growth of 4.6%. We continue to make good progress in identifying new storage opportunity, while organic volume increased 40 basis points in our Global Records Management business.

Good momentum driving improved operational efficiencies across the organization and data centers delivering strong organic growth. We have leased 7 megawatts through the second quarter, in line with our full year expectation of 15 megawatts to 20 megawatts. Moreover in Q3 is getting off to a strong start with 6 megawatts leased signed in Northern Virginia.

Starting with the review of our financial and operating performance in the quarter, total revenue increased 3% year-over-year on a constant currency basis to $1.1 billion. This growth was driven by an almost 5% increase in storage revenue, partly offset by lower service revenue growth, reflecting lower recycled paper pricing, which I will touch on in a few minutes.

The cost issues we experienced in Q1 were fully corrected during the quarter, which is evident in the sequential adjusted EBITDA margin expansion of 210 basis points above the high end of the 150 to 200 basis points margin expansion we guided to on our last call, despite some one-time cost. As you saw from our press release this morning, we have tightened our guidance ranges, given we are halfway through the year and there has been less variability in FX rates than we expected, when we provided our initial guidance.

We now expect revenue to increase between 2% and 4% year-over-year and adjusted EBITDA to increase between 2% and 5% year-over-year on a constant currency basis, remaining within our initial guidance ranges. We remain focused on successfully executing in the second half, despite some external headwinds with a strong finish to the year anticipated setting us up to enter 2020 in a good position.

Turning back to Q2 performance. We also continued to see good organic growth with organic storage revenue growth up 2.4% for the second quarter and 2.2% year-to-date, reflecting continued strong growth from data center, the other international segment, adjacent businesses and stable performance in Western Europe and North America. Revenue management, particularly in North America is trending ahead of our expectations.

Total organic service revenue growth was negative 2% for the quarter and roughly flat year-to-date due to lower recycled paper prices. We expect this to remain a headwind for our service business for the remainder of 2019, as we cycle over record pricing a year ago. It should be noted, however, the headwinds from paper price on a year-over-year basis amount to $20 million to $30 million on what was last year $115 million of revenue from the sale of paper. The actions we have taken are more than enough for us to manage this headwind and maintain our profit goals, given it is less than 1% of the revenue in the overall business, albeit a little less than 2% of the profit.

Turning to business performance. We continue to see good growth in the alternative storage categories including adjacent businesses, consumer and other. Volume in consumer and other grew more than 760,000 cubit feet sequentially, or 31% in part reflecting strong demand for high touch consumer storage during the peak season.

In our Records Management business, we organically added roughly 3 million cubit feet of net record storage volume worldwide over the past 12 months, representing 40 basis points of growth and increasing trend driven by both new sales and lower destructions. More specifically developed markets organic volume declined by about 60 basis points, a slight improvement from Q1, organic volume growth in the other international segments continues to grow at a faster clip, increasing 3.4% driven by an increase in new sales of 9.7% and modestly lower destructions. We are encouraged by the consistent performance of our global records management business and continue to see a solid commercial pipeline.

Shifting to our digital solutions business, we continue to support our customers' evolving needs by providing a number of digital solutions. To this point, our Information Governance and Digital Solution team or IGDS had a very good Q2 with a number of wins and a healthy pipeline that is expected to deliver strong double-digit revenue growth this year. In conjunction with our federal team, IGDS was awarded a nearly $13 million contract from General Dynamics Information Technology. Under a sub-agreement Iron Mountain will perform work as part of a digital transformation initiative for a government agency.

As it relates to our Iron Mountain InSight platform in partnership with Google, we continue to see good momentum for this innovative solution, which is powered by existing Iron Mountain products and services, adding even more value to our portfolio of digital solutions. In Q2, we signed a deal with a large financial services customer for a comprehensive solution to manage the document work flow process of auto loans. In addition to providing this customer with scanning and secure storage of loan documents InSight extracts and validates the data, verifies the signatures and certifies authenticity of the loans in associated collateral.

We decided this quarter to evaluate alternatives with regards to the infrastructure supporting select offerings within our Iron Cloud portfolio. We generally approach our digital solutions based on a hybrid model in terms of what we developed internally and who we can partner with for best-in-class technology solutions for the right cost. This evaluation has led us to a shift in partnership approach from some of our Iron Cloud solutions such as object store in resulted in a one-time drag on our reported results this quarter, which Stuart will discuss in a moment.

Finally, as mentioned earlier, our data center business continues to build leasing momentum in conjunction with the build out of our platform. As mentioned earlier, in early July, we signed a 6 megawatt deployment in Northern Virginia, which is expected to commence later this year. I want to congratulate the data center team for the successful execution of this deal. It's a great accomplishment and should add significant value to our campus ecosystem.

Looking at data center leasing activity in Q2, we signed 3 megawatts of new and expansion leases, primarily driven by enterprise demand. Year-to-date, including the new lease in Northern Virginia just mentioned, we have leased 13 megawatts with clear line of sight to achieving the high-end of our annual target of 15 megawatts to 20 megawatts. Furthermore, we continue to demonstrate the strengths of our customer relationships, when winning retail sales focused on large enterprises, building private cloud infrastructure.

Consistent with the first quarter activity, approximately 40% of our leasing pipeline was generated by our non-data center sales team. Cross-selling opportunities like this will continue to help us realize synergies, as the data center business grows. As it relates to development activity, we are on track to deliver the first phase of new capacity at our Phoenix Campus expansion with grand opening scheduled for August 15th and an additional 5 megawatts of capacity scheduled to be delivered across three international markets in Q3.

In summary, Q2 was a strong quarter that demonstrates the durability of Iron Mountain with continued improvement in global storage organic revenue and volume growth, enabling us to continue to invest in new growth areas to support our long-term business model. We are encouraged by the momentum we see in our data center business and we'll continue to expand that platform and drive further synergies across the business, while our digital services and solutions are helping our customers to solve new business challenges.

With that, I will turn the call over to Stuart.

Stuart Brown -- Chief Financial Officer, Executive Vice President

Thank you, Bill. And thank you all for joining us to discuss our second quarter 2019 results. As Bill mentioned, we are pleased with our second quarter performance with revenue of nearly $1.1 billion. Total revenues increased 0.6%, or 3.1% excluding the impact of the stronger dollar. Our storage rental revenue increased 4.6% on a constant currency basis, driven in part by growth in our data center, emerging markets and adjacent businesses. Total service revenue increased 0.7% at constant currencies.

As you can see on Slide Six, total organic storage rental revenue growth accelerated to 2.4% in Q2, reflecting results from revenue management and global volume growth. More specifically, developed markets organic storage revenue growth came in at 1.3% for the quarter, reflecting continuing contributions from revenue management and volume trends.

In the other international segment, we achieved continued healthy organic storage revenue growth of 3.7%. Year-to-date, organic storage revenue growth was 2.2% and with a strong commercial pipeline and a modest decrease in records destructions, we now expect full-year organic storage revenue growth of 2.2% to 2.8%. This underscores the consistency and durability of our high margin storage business and strength of our commercial teams

Organic service revenue, however, declined 2% in the second quarter, as we cycle over growth of 7.6% a year ago. This mainly reflects the swing in paper prices, which were record high as last year and currently about 20% below the five-year average, driven in part by two large paper mills in North America that were offline in Q2, and lower pulp prices, leading to an oversupply of paper for recycling.

Assuming prices stay at these low levels, the year-over-year impact of revenue and adjusted EBITDA is about $25 million and assumed in our current outlook. Given this and lower destruction service revenue, we now expect service organic revenue growth to be flat to down 50 basis points for the full year, and therefore, total organic revenue growth to be in a range of 1.3% to 2% in 2019.

While reported service revenue was lower than we anticipated, remember that many of our services provide important support to our core storage business promote deeper customer relationships and are increasingly designed to solve our customers problems, managing and analyzing both physical and digital assets. Our digital services are growing nicely, and we continue to evaluate test and grow them to enhance our business and grow new lines of revenue over time.

Lastly, as it relates to organic revenue growth, we generate some of our best returns on capital from acquisitions of customer relationships, which are not dissimilar from paying commissions to our sales teams, as we pay a local competitor for the customer contracts and integrate with our existing business. We include the revenue, as well as the investment as part of our organic growth, given the similarity to competitive takeaways, the timing can be a bit lumpy. To give perspective, over the past three years, annual investments of range from $30 million to $70 million. These low risk, high return, sales-enabled acquisitions are part of our core growth strategy, particularly in developed markets. Year-to-date, they have contributed about 60 basis points of the 2.2% total storage organic growth.

Now turning to our data center business. We are very pleased with the leasing progress and momentum. The data center business delivered organic revenue growth of around 6% in Q2 and signed 3.2 megawatts of new and expansion leases. Churn during the quarter was a more normal 1%, but this will vary over time, given the size of our data center portfolio and will tick up again in Q3.

Additionally, we agreed with one of our customers to shorten leases in two of our markets and exchange for higher rental income during the remainder of their modified term. While this will generate elevated turn in the first quarter of 2020, this was a strong positive for our data center business as it freed up capacity in Northern Virginia, enabling us to win the 6 megawatt deployment that Bill mentioned.

As you can see on Slide Seven, SG&A, excluding significant acquisition costs grew by $8 million from a year ago. This was primarily caused by higher compensation expense related in part to the consolidation of acquisitions and our investment in a global operation support team, as well as by increased technology expense.

Our adjusted EBITDA declined $17 million year-over-year, a 5% to $351 million. Excluding the impact of currency changes, adjusted EBITDA declined $9 million or 2.6%. As Bill mentioned, there were some -- there were several one-time items that impacted adjusted EBITDA by approximately $10 million in the quarter. These included a $4 million charge related to our Iron Cloud infrastructure and the remainder for charges related to building damage that occurred during the quarter. AFFO in the second quarter was $210 million compared to $228 million a year ago. This decrease reflects the stronger dollar and other changes impacting adjusted EBITDA, as well as somewhat higher interest expense in quarterly cash taxes, partly offset by lower non-real estate investments.

Slide Eight details the adjusted EBITDA margin performance by business segment. The North America RIM margin resumed year-over-year expansion in the quarters, we address the cost issues experienced in Q1. Excluding the change in lease accounting, which reduced margins in the segment by about 20 basis points compared to a year ago, the EBITDA margin in the segment expanded 30 basis points.

The North America Data Management margin declines continue to be driven by lower volumes as well as product mix. Revenue management is helping to offset some of the declines and support healthy margins. In Western Europe, Q2 margins contracted 20 basis points, reflecting higher temporary facility costs and professional fees for process improvements. Some of our recent acquisitions of customer relationships in the region are operating at lower margin until we can fully synergized.

Other International margins were up 30 basis points in the quarter, despite a 75 basis point impact from the adoption of the new lease accounting standard, reflecting the increased scale of geographies and continuous improvement initiatives. In the Global Data Center segment, adjusted EBITDA margins were 44.4% in the second quarter, partly reflecting the acquisition of EvoSwitch in the Netherlands last May, which operates at lower average margins and the impact from churn that occurred in Phoenix in Q1.

As you have seen in our release, we have had an immaterial restatement of our prior period results. During the quarter, we received a notification of assessment from tax and customer authorities in the Netherlands related to value-added taxes on specific business-to-business customers activity performed by our bonded business, which we acquired in 2017, and as part of Entertainment Services. As a result, we have made an immaterial restatement of our prior period financial statements, which can be seen in our 10-Q to be filed later today.

Turning to Slide Nine, you can see that our lease adjusted leverage ratio remains in line with other REITs and was flat with Q1. We are on track with our plans to generate $100 million plus of capital recycling proceeds this year from the sale of real estate and we continue to explore options for a JV investment partner for our Frankfurt data center development. And therefore, we expect our leverage ratio to decline in the second half of the year.

Also, we are encouraged by the recent momentum we have seen by the REIT coverage teams at the rating agencies. As we mentioned in Q1 [Phonetic] S&P revised our outlook from stable to negative. Similarly, Moody's revised our outlook to stable in June based on the strength and diversification of our business model, with strong cash flows from our core storage business. Our balance sheet remain solid and we continue to invest and grow the business at very attractive return to low risk.

Turning to outlook. You can find the details and underlying assumptions in the appendix or in our Q2 supplemental. Given these -- given the investments we've made to improve efficiencies, coupled with the operational improvements implemented in Q2 and additional initiatives under way, adjusted EBITDA should continue to ramp through the back half of the year.

AFFO and adjusted EPS guidance ranges have been adjusted to reflect the revised EBITDA guidance and for earnings per share also for higher depreciation. We have also updated our expectations around capital allocation. Given the increase in leasing activity, we now expect data center investments to be about $50 million higher this year, but have reduced our outlook for business acquisitions, due to the expected timing of closings of deals in the pipeline. As a result, we are reducing our expectation for M&A capital to $100 million from $150 million previously.

In summary, Q2 reflects healthy and consistent revenue performance from our storage business. While the paper price environment is a headwind, we have been taking steps to mitigate its impact on profitability. Our actions to improve margin performance from Q1 levels are evident in our results and we are confident in further improvement in the back half. We are excited about the leasing activity and pipeline in our data center business and remain pleased with the solid and sustainable revenue growth our teams are delivering.

With that, I will turn the call back over to Bill for some additional comments before opening up the line for Q&A.

William Meaney -- President and Chief Executive Officer

Thanks Stuart. Before we open up the call to your questions, I wanted to take a step back from the quarterly detail and remind you of our long-term business model, which is supported by the durability of the records management business. As an organization, one of the biggest assets we have is the extremely deep and long-lasting customer relationships, which provide us access to 950 of the Fortune 1000. These relationships are built on decades of trust and delivering best-in-class storage and value-added services. Having earned the reputation of trusted guardian of our customers' assets allows us to leverage these relationships to identify cross-selling opportunities in drive significant synergies across our growing data center platform, particularly among enterprise customers, establishing a private cloud infrastructure and looking for a secure and reliable IT environment.

A second key asset that Iron Mountain possesses is our durable developed markets record management business, which has allowed and will continue to allow us to consistently deliver strong organic cash flow, enabling us to fund future data center growth, scale our emerging markets footprint and invest in innovative solutions to meet our customers' needs. These two significant assets underpin our overall financial strategy and continue to support and grow our very strong customer relationships.

The resulting sustainability of the core business and growth in the data center business will support our target of achieving consistent 5% plus organic adjusted EBITDA growth, flowing through to AFFO growth and generate returns above our cost of capital. We will remain very disciplined in our capital allocation decisions, balancing investments that will create value for shareholders, while providing more solutions to our customers.

With that operator, please open up the call to Q&A.

Questions and Answers:

Operator

We will now begin the question-and-answer session. (Operator Instructions) The first question is from Sheila McGrath of Evercore. Please go ahead.

Sheila McGrath -- Evercore ISI -- Analyst

Yes, good morning. Bill, at first quarter, you did have some impact from excess labor that impacted margins. It looks like you right at the ship better than your guidance in second quarter. I was just wondering if you could update us on cost optimization initiatives, how they're progressing and if you have any change in how you expect the margin improvements to play out for the second half of the year?

William Meaney -- President and Chief Executive Officer

Thanks, Sheila. So yeah, we were pleased as you noted that we were above our guidance in terms of sequential EBITDA margin improvement. We updated the guidance by actually tightening the range and what we do, we will see is continuing stepped up of the margin over the course of the year. In other words, there will be a ramp in the second half of the year, but we feel really good about the line of sight that we have to be able to finish up the year in strong shape. So, the improvements that we made in Q2 more than offset the change things structurally that more than offset that, that miss on the labor in the first quarter. So, we feel really good in terms of the incentive for the second half, but there will be a ramp.

Sheila McGrath -- Evercore ISI -- Analyst

Okay, great. And I just wanted your view on the market is not giving you credit clearly right now for the premium, dividend yields, given where shares are just you're like bigger picture thoughts on either bringing in the capital partner on some of the data centers. So, to create liquidity to maybe buy back shares at these levels.

William Meaney -- President and Chief Executive Officer

Well, I think we're -- I think you'll probably appreciate we're not going to talk about back on the call. From a capital allocation standpoint as a Board, we look at everything about in terms of where we invest money and how we deploy that, that includes everything from how we give money back to the shareholders, whether that through a dividend or share buyback. So, everything is always on the table, when we look at it, but at these dividend yields at some point our share will become pretty good value. But we're not -- we look at the full range of options.

Right now, we really like the capital allocation decisions we have in terms of growing the data center business and also building out our business, our traditional business in emerging markets and some of our new digital solutions and we're seeing the growth. And I'm always the optimist. I feel that at some point our dividend yield reflects probably a lack of appreciation for what we're doing as a company and eventually gravity does reinsert itself and that is self-correcting as the share price goes up.

Sheila McGrath -- Evercore ISI -- Analyst

Okay, great. Thank you.

Operator

The next question is from Nate Crossett of Berenberg. Please go ahead.

Nate Crossett -- Berenberg Capital Markets, LLC -- Analyst

Hi, thanks. Good morning, guys. I just wanted to follow-up on that margin improvement question. I think on the last call, you kind of guided to 600 basis points ramp by the year-end. So, I know you said that's going to ramp through year-end, but is that 600 give or take still in place?

Stuart Brown -- Chief Financial Officer, Executive Vice President

Hi, Nate. This is Stuart. Yes, if you look at the ramp in the margin that's implied, I think, the way to look at it, right, if you think about sort of Q2 normalized EBITDA adjusting for the $10 million that we talked about, Q2 normalized EBITDA was about $361 million. So, guidance of the 14.40 of the 14.80 by just backing into what the second half EBITDA growth is, implies an EBITDA growth of 765 to 805, but on that range. So, that's a ramp from Q2 normalize about $20 million to $40 million per quarter. And you think about even just the first quarter, we improved $35 million from the first quarter.

So, the ramp in EBITDA margins, you should continue to see and the benefits that we get as we move through the year, we talked about in the last quarter call, right. We've got revenue management and most of our pricing takes place in Q2. Actually, more of it takes place in Q3, so you get the benefit as we move through the year of pricing and then the continuous improvement initiatives that Bill touched on, led by the global operations support team, which really continues to focus on improved labor productivity, particularly in things like Latin America service margins focused on fleet utilization and a number of other areas. We've got initiatives under way to meet the guidance.

Nate Crossett -- Berenberg Capital Markets, LLC -- Analyst

Okay, thanks. And then on just the organic growth number, I appreciate your comments on how much customer acquisitions effects that number. And so I just want to be clear that if you take the 2.2% and you subtract 60 basis points, is that 1.6, a true same-store metric by real estate standards or?

William Meaney -- President and Chief Executive Officer

I don't think you can compare it to real estate standards because real estate, the REIT industry does NOI on a building-by-building basis. You've got to remember the nature of our business is, that we store our customers records and information, they don't care, which building it is. So, it's not a building-by-building basis, I think about for an office building or warehouse. So, that's why it's organic growth and not sort of the same-store growth.

Nate Crossett -- Berenberg Capital Markets, LLC -- Analyst

Okay. And then just one last question on the noble [Phonetic] lease, I'd be curious to get a little more color on how you won that deal because some of the other guys have been saying that Northern Virginia is very competitive and, there is pricing pressures and so I just be curious on how you won that?

William Meaney -- President and Chief Executive Officer

Yeah, I think, yeah, look, we continue to see our down selects ahead of where we have capacity deployed. And I think it's partly because of the brand and I mentioned the cross-selling and the fact that we, in the last two quarters have been consistent about getting 40% of our lead generation from the other side, the traditional side of the business. And our focus on those customers that are heavily regulated to have very high requirements, which is mainly financial services, government and healthcare.

I mean, not that all our customers are in those categories, but that's kind of our focus. So, we continue, we look at Northern Virginia, I totally take your point, there is a lot of capacity in Northern Virginia. It is the largest data center market globally. So, just also a lot of absorption. But that focus, I think it's allowed us to build a pretty good pipeline. So, we feel really good about the pipeline, we have for Northern Virginia right now.

Nate Crossett -- Berenberg Capital Markets, LLC -- Analyst

Okay. Thanks guys.

Operator

The next question is from Eric Luebchow of Wells Fargo. Please go ahead.

Eric Luebchow -- Wells Fargo -- Analyst

Hi, thanks for taking the question. I just wanted to follow-up on the Northern Virginia lease. I know we've heard from some of your competitors that pricing and returns have been kind of compressed there. So, I'm just curious if for some of these larger scale leases, if you're underwriting kind of a lower return, but a longer contract duration, or how you kind of look at that balance, particularly as you sign these larger scale leases in data centers?

William Meaney -- President and Chief Executive Officer

It's a good question, Eric. So, let me answer the question in two different ways. So, we actually had quite a bit of leasing activity in Northern Virginia in Q2 and that we see those the kind of normal rates, when I'm talking about the retail -- where I'd call retail contracts or leases. On the specific 6 megawatts that is a hyperscale lease. So, we are seeing kind of the 8% to 9% cash on cash returns, which is where we've built our business model.

So, that will when you start seeing that come through, you'll see that at a lower rate, but it's in -- but we think it's very consistent, not just with Northern Virginia, globally we expect those kinds of cash on cash returns, when we sign up hyperscale customer. You're obviously getting bigger deployment, so when you actually look at the overall returns and the returns on the campus, as we said, I think previously on calls, as we think that to maximize or optimize return on a campus the size of Northern Virginia. We expect to have somewhere between 40% and 50% of the leases in those kind of 8% to 9% cash and cash returns, when the site is fully built out and it's consistent -- consistent with that. But I would say, the pricing on that 6 megawatts is less to do with Northern Virginia, just to do with the returns have better in the market for those types of customers.

Eric Luebchow -- Wells Fargo -- Analyst

Okay, thanks. That's helpful. And then just one more for me. Given that you took data center development CapEx up $50 million. Curious how that impacts your leverage outlook for this year and into next year versus previously? And then could you talk about potentially your ability to recycle more of your industrial real estate portfolio above the $100 million that -- $100 million plus you have in your guidance?

Stuart Brown -- Chief Financial Officer, Executive Vice President

Yeah. Thanks, Eric. Yeah, as we said over the last couple of quarters, we see ourselves landing lease-adjusted leverage around 5.5 times at the end of the year. If you look at sort of how it's going to come down from where it was at the end of Q2. Right we benefit really from three things. First of all, increasing EBITDA year-over-year, right, the leverage is calculated on a trailing 12-month basis.

Second, the capital recycling under way. We've got a sale leaseback portfolio in the market now of industrial properties and a second property, we're about to start marketing. So, we feel very confident in the $100 million plus that was built into our guidance currently. We could do more. There is a lot of demand out there for industrial real estate. We're trying to be prudent in sort of putting the portfolio the right way.

The third thing to call out is the data center leasing, because the way our covenants work in our credit facility, as we get credit, because it's a trailing 12-month basis, on development properties, we get credit for leases that have been signed. So, because you put capital out to develop it upfront, so you get all 12 months of EBITDA credit related to those leases. So, that also helps get to the around 5.5 times.

Eric Luebchow -- Wells Fargo -- Analyst

Okay, great. That's helpful. Thank you.

Operator

The next question is from George Tong of Goldman Sachs. Please go ahead.

Blake Johnson -- Goldman Sachs -- Analyst

Good morning. This is Blake on for George. Thanks for taking my question. It looks like organic volume growth in Other International was supported by growth in new sales in the quarter. Can you discuss specific storage volume trends that impacted new sales in other International. Are you seeing increasing demand in emerging markets or anything else there would be great?

William Meaney -- President and Chief Executive Officer

Good morning, Blake. Thanks for that. Yeah, no, I think we -- I think overall, not just I would say in emerging markets, but if we look at our commercial pipeline in our records management business globally, it's still -- it's very healthy, because obviously that's what we look for to give us our confidence going forward into -- for the quarter. So, it's just generally, I would say across the globe, we have a pretty good commercial pipeline over the next 12 to 18 months.

Specifically on emerging markets, yes we continue to see that and it's usually in markets like India for instance, where there is still a very large, what I call unvended opportunity. I think I might have mentioned previously, there is a specific customer in India that we just want to part of their business. Historically it was all in-house and it was over 20 million cubic feet. This is single customer in India.

So, if you think about North America, which is 500 million cubic feet in total. There is a single customer in India that has over 20 million cubic feet in-house. So, that just gives you the scale of the type of pipeline that we're building a line of sight to future demand that we have in some of these market. So, we continue to be quite encouraged by what we are, what we're building.

Blake Johnson -- Goldman Sachs -- Analyst

Great. Thank you for that. Also previously you discuss specific initiatives of the global operations team, including transportation cost efficiencies. Can you discuss progress on these initiatives and what are your expectations are for the remainder of the year?

Stuart Brown -- Chief Financial Officer, Executive Vice President

Yeah, Blake. I guess it's built into our guidance. I don't want to talk about specific result of the initiatives. But yeah, we've got a number of initiatives going on both to improve efficiency in North America transportation, when we look at our Data Management business and fleet in the Records Management business -- efficiencies on the labor side, particularly focused in Latin America, where labor productivity, we think we've got some improvements there, as we take some of the labor standards that we've employed here.

In North America some of the efficiencies, where just to give you a specific example. In Latin America, we've traditionally staffed each project team separately, where in North America we sort of cross-trained people better and we can use them across projects. We're putting that same initiative in place in Latin America, which will help Latin America service margins as well. So, there are number of things going on. I think we've got if we total up each initiative from the global operation support team, I mean there is well worth -- well north of 50 different things that they're working on to keep taking costs, as part of our continuous improvement initiative. I think having a global now let's just really cross-breed ideas of faster and implement them faster across the organization.

Blake Johnson -- Goldman Sachs -- Analyst

Great, very helpful. Thank you.

Operator

The next question is from Andrew Steinerman of JPMorgan. Please go ahead.

Andrew Steinerman -- JPMorgan Chase -- Analyst

Good morning. Looking at Slide 14 bullet one, are you raised your organic revenue growth, a storage range from a quarter ago, it was 1.75% to 2.5% and now it's 2.2% to 2.8%. What factors give you confidence to take up the range? Meaning what are the most important factors to take up the range? Is it lower destruction, higher revenue management, higher backlog. Just give us a relative sense of what are the most important factors that improved over the last quarter?

Stuart Brown -- Chief Financial Officer, Executive Vice President

Andrew, good morning. You almost answered the question for me. It's pretty much three of your four. So, if you think about it, first of all, we are looking at the commercial pipeline, when we move these ranges. So, really like in terms of the pipeline that the -- and we look at what stage they are in the pipeline in terms of how long we've been speak to the customers. So, that's one aspect.

Destructions are ticked down slightly. So, last year I think they were up -- destructions were up. So, if you look at this year, they are trending back to what I would call more normal levels. I wouldn't say they're down unusually, but they've come down from last year. So, that's the second aspect.

And the other thing is, we're getting, especially in North America, we're getting more joy from our pricing initiatives that we've actually rolled out pricing initiatives to customers, where we were a little bit shy more and those seem to be sticking pretty, pretty well. So, it's a combination of revenue management especially specifically in North America. And then looking at destruction levels going back to kind of what I would call more norms. And then looking ahead at the commercial pipeline.

Andrew Steinerman -- JPMorgan Chase -- Analyst

Great. And could you just give a reason why you feel like destructions are normalizing now, what gives us confidence that that's going to stick?

William Meaney -- President and Chief Executive Officer

Well, first of all, these are relatively small movements, but they have sizable impact, right because you're talking about small movements. If you just on a business of 700 million cubic feet. So, a little bit of change in that can make big differences. I think last year we all have our own hypothesis, we speak to customers all the time, but many times of our customers aren't crisp in their response. But I think last year probably it was a combination of some of the GDPR cleanup, people were going into bring themselves into compliance and destroying a lot of their documentation rather than trying to bring it into compliance. And then the other aspect is, we did get some legal holds that got released in the financial service industry.

So, I think those two things alone probably attracted a bit of it and it's the best feedback we're getting from our customers at this point. So, our expectations that will kind of trend at the more what I would call usual levels pretty last year and you can see that kind of bleeding through this year.

Andrew Steinerman -- JPMorgan Chase -- Analyst

Thank you.

Operator

The next question is from Shlomo Rosenbaum of Stifel. Please go ahead.

Shlomo Rosenbaum -- Stifel Nicolaus -- Analyst

Hi, thank you very much. Can you delve a little bit more into the pricing in North America. You said I think you described it, Bill, as getting more joy over there. What exactly is it, are there charges there and put through, straight off contracts? Is it something that you feel as a sustainable thing that you could do on a regular basis. If you could just give us just a little sense of that?

William Meaney -- President and Chief Executive Officer

Okay. Good morning, Shlomo. So, I think that kind of two aspects. I mean, one is watching the story is about two-thirds of our pricing actions come in the second half of the year versus the first half of the year. So, we have that normal uptick, but specifically what's different this year than last year, it is that quite frankly as we start rolling out revenue management, ones you're always shy of is your largest customers, right, because there, if there's any elasticity, obviously you feel it in volume in larger dimensions.

I think the last couple of years have given us confidence as a team and specifically more in North America that we are able to roll-out the same kind of revenue management or pricing discipline to our larger customers, as we kind of our mid-sized customers. And that was built on the confidence with the mid-sized customers and as we've gone into this year in the first half of the year, we've seen that we have been able to actually achieve that. So, in a lot of this, I think, I've mentioned before on pricing, a lot of it is change management internally. In other words, giving our folks the confidence that, that they can charge the right price for the service that we're delivering.

Shlomo Rosenbaum -- Stifel Nicolaus -- Analyst

Okay. And then if you could just, in the supplemental Slide Nine, on the Records Management in developed markets. So, there is a trend that seem to be going on from like 4Q, where the volumes were declining sequentially, you bucked a trend in 1Q ticked up and then is down again in 2Q. Why is that trending down even if destruction seem to be moderating. I'm just trying to get a handle as, is the trend continuing downwards? Or are we stabilizing, just trying to get a sense of what's going on there?

Stuart Brown -- Chief Financial Officer, Executive Vice President

Yeah, I think it's more of a stabilized trend. I mean if you look at the, specifically on the developed markets the chart that you're referring to, is if you go down into the detail, I'd say a, yeah, moderation in terms of new sales in Q2. But if you kind of look at over 12-month basis, it goes up and down. So, when we look at that and we look at giving our projections going forward, as we look at the commercial pipeline.

So, I think it is developed markets will be, as we said, it will be more on the negative side of neutral, so to speak, it will be slight downward tick more than offset by revenue management. So, we build that into our projections and at the end of the day, what we're delivering is total organic revenue sales or organic storage sales, feel really comfortable with that. But in terms of looking at the volume that your question that you're asking is, we then look forward at the commercial pipeline and we think it's going to be kind of in that range kind of up and down.

Shlomo Rosenbaum -- Stifel Nicolaus -- Analyst

Okay. If I could just sneak in a last one, the 20 million cubic feet customer in India. When -- is that already rolling in now? When is that supposed to roll in it sounds like, it's actually a pretty big deal.

William Meaney -- President and Chief Executive Officer

I wish it was the whole 20 million. They are not outsourcing everything that they have and they actually split it between two of us. Actually we got more than half. So, we've got the bulk of it. So, they didn't outsource the whole 20 million. I think over time they will. And that's already starting to flow into our Indian operation.

Shlomo Rosenbaum -- Stifel Nicolaus -- Analyst

Okay, great. Thanks.

Operator

The next question is from Andy Wittman of Robert W. Baird. Please go ahead.

Andrew Wittman -- Robert W. Baird & Co. -- Analyst

Okay. Thanks for taking my question guys. Stuart, I appreciate your comments on the acquisition of customer relationships, otherwise known in the industry as the pick-up and move business. I guess, as I look at this, I wanted to understand a little bit more, I guess, last year you guys spent about $60 million. This year you're on track for about $90 million for these types of customer relationship acquisitions.

You mentioned that you pay a sales commission anyway and so there is cost either way. What is the delta in cost, if you look at it on a per box basis or some normalized basis between the two as you compare them. I mean $90 million this year, I mean, it's clearly driving growth you said 60 basis points of volume. But how does that compare it seems like it's more expensive than the sales commission, but why don't you help us understand that a little bit more?

Stuart Brown -- Chief Financial Officer, Executive Vice President

Yeah. I think it's actually -- it's actually not very complicated. So, on average we spend, I think probably at $60 million a year and this year, I would expect is to be sort of around that as well. And that includes mostly box it mostly in the developed business in the developed markets, some of it -- a little bit of it in the shred business as well. So, it could sort of spread between the two. And as we said before, typically we will bring in 3 million to 4 million cubic feet a year in tuck-in.

When you're comparing the cost between bring it in, through a salesperson, you typically get a number of different cost because when you're bringing into sales person depending upon if it's at the customers today or the competitors, you get some different costs. So, we've got the sales commission, you have to pay, which right, it is a portion of it. If its at a competitor, you're often reimbursing the customer for their permanent withdrawal fees as they have got to pay for the competitor, right, which can be pretty substantial.

And so you compare that to a [Indecipherable] we are typically paying around three-times revenue, you actually you don't get that much of a difference. But you get the volume benefit and efficiency benefits of doing it and moving in one-time efficiently and once you fully integrated and synergized you are at about a 90% margins of the flow through. That's really good. So, you've got a payback of less than four years with integration costs, which has given you a cash-on-cash return of 25%. So, our goal is to be transparent about it. We view it as organic and because it is like sales or some other competitive takeaway, we will provide the information to investors, but it is part of our organic growth and we think about it that way part of our organic capital spend as well.

Andrew Wittman -- Robert W. Baird & Co. -- Analyst

Okay, that's super helpful. So, in there, I heard that you're expecting actually $60 million for customer relationships. So, I'm sorry to misquote you. And my question there, where it is $90 million. So, that implies that not the -- the difference between the $90 million that's in your Slide 15 in the

$60 million you mentioned there is the customer inducements, which are basically those perm out withdrawal fees. Is that the right way to think about it?

Stuart Brown -- Chief Financial Officer, Executive Vice President

Correct. Yeah, that's correct.

Andrew Wittman -- Robert W. Baird & Co. -- Analyst

Okay, cool. That's what I wanted to understand. Thank you for your help.

Operator

The next question comes from Marlane Pereiro of Bank of America Securities. Please go ahead.

Marlane Pereiro -- Bank of America Merrill Lynch -- Analyst

Hi, thank you for taking my question. I just had a quick question regarding, can you talk about funding the $395 million of incremental capital for investments, and getting leverage to around 5.5 times by year-end?

Stuart Brown -- Chief Financial Officer, Executive Vice President

Yeah. I think I touched already. There is a couple of different ways to look at it. I mean I touched on the leverage change from year to year end both from the capital recycling. I think the thing to remember, Marlene, is that as EBITDA grows right, that allows you to borrow against that and still reduce leverage. So, if our EBITDA grows $100 million organically per year, you can theoretically at five-times borrow $500 million and still reduce leverage from where we are at the mid-five level. So, you can do both at the same time and fund those capital needs.

Marlane Pereiro -- Bank of America Merrill Lynch -- Analyst

Great. So, just to be clear, you do expect as communicated last quarter that you expect leverage to kind of to get down to roughly that 5.5 area?

Stuart Brown -- Chief Financial Officer, Executive Vice President

Yeah, which is, and I repeated that in my opening remarks as well.

Marlane Pereiro -- Bank of America Merrill Lynch -- Analyst

Yeah. Yeah, great. Thank you.

Operator

(Operator Instructions) The next question is from Kevin McVeigh of Credit Suisse. Please go ahead.

Kevin McVeigh -- Credit Suisse -- Analyst

Hello?

William Meaney -- President and Chief Executive Officer

Yes.

Kevin McVeigh -- Credit Suisse -- Analyst

Yeah. Can you hear me? Hey Bill or Stuart. Nice job on the margin sequentials. The paper headwind weren't as much as what we had modeled. Can you help us understand, what you're using for the spot price kind of where that came in the quarter, and then how we should think about that over the balance of the year?

Stuart Brown -- Chief Financial Officer, Executive Vice President

Yeah, Kevin, and just -- yeah, I appreciate the question, because there's been a number of questions about it.

Kevin McVeigh -- Credit Suisse -- Analyst

Yeah.

Stuart Brown -- Chief Financial Officer, Executive Vice President

Let me start off with, I mean, our initial guidance already assumed the paper prices would be declining. So, our initial guidance we assume the paper prices would decline about $10 per ton from 2018 and on a price per ton basis $10 per ton equates to about $6 million of EBITDA. So, if you sort of say, OK what's now inherent in our current assumptions and Bill touched on his remarks and I did as well.

If paper prices stay at current levels and that's down about $40 per ton from a year ago, by that $40 per ton is about $25 million impact year-over-year, right. And so we think about it versus guidance that's about $20 million headwind, relative to our guidance. Other thing just for people to remember as well. But we have really high quality sort of office paper. So, when we go into market to sell, we do sell it at a higher price and what people may be saying in the index.

Kevin McVeigh -- Credit Suisse -- Analyst

That's helpful. And then just, hey Stuart, what was it that kind of helped the margin recovery? I mean I know in the first quarter was kind of, there were some unexpected cost around labor, things like that. What were you able to put in place, that kind of help boost the sequential and then the improvement that we'll see over the balance of the year?

Stuart Brown -- Chief Financial Officer, Executive Vice President

And remember that despite the $10 million of headwinds that we booked as well.

Kevin McVeigh -- Credit Suisse -- Analyst

Right.

Stuart Brown -- Chief Financial Officer, Executive Vice President

And again, I mean, we came out of, when we talk about in the first quarter call, we came out with a lot of confidence in terms of our ability to recover the fact was, is it the labor issue that we had in first quarter was late in the quarter, we could have recovered in the quarter. And again, I think for me from an execution from our operations teams out there around the world, they're the ones, who really get the credit both Bill touched on the revenue management programs we've got in place cost take out. There's a lot of work we have to do, right. There is a lot of opportunities for us in terms of leverage in the company to move margins and to get more efficient and we work on delivering those every day.

Kevin McVeigh -- Credit Suisse -- Analyst

Got it. But was that maybe I guess -- can you give us some examples, was it like maybe lower bonuses to drivers or was it just any thoughts on kind of--

Stuart Brown -- Chief Financial Officer, Executive Vice President

Absolutely not. We're not taking this out of the backs of our, of the mountaineers out there, who are serving our customers every day.

Kevin McVeigh -- Credit Suisse -- Analyst

Got it.

Stuart Brown -- Chief Financial Officer, Executive Vice President

It is -- if you look, you can see a labor efficiencies, our labor actually year-over-year as a percentage of revenue is down. There is some price flow through, all again most of that will come through in the back half of the year and then efficiencies and just other cost of sales, as well around transportation in some of the other areas.

Kevin McVeigh -- Credit Suisse -- Analyst

Got it, OK. Thank you.

Operator

This concludes our question-and-answer session and today's conference call. The digital replay of the conference will be available approximately one hour after the conclusion of this call. You may access the digital replay by dialing 877-344-7529 in the US and +1-412-317-0088 internationally. You will be prompted to enter the replay access code, which is 10132020. Please record your name and company when joining.

[Operator Closing Remarks]

Duration: 51 minutes

Call participants:

Greer Aviv -- Senior Vice President, Investor Relations

William Meaney -- President and Chief Executive Officer

Stuart Brown -- Chief Financial Officer, Executive Vice President

Sheila McGrath -- Evercore ISI -- Analyst

Nate Crossett -- Berenberg Capital Markets, LLC -- Analyst

Eric Luebchow -- Wells Fargo -- Analyst

Blake Johnson -- Goldman Sachs -- Analyst

Andrew Steinerman -- JPMorgan Chase -- Analyst

Shlomo Rosenbaum -- Stifel Nicolaus -- Analyst

Andrew Wittman -- Robert W. Baird & Co. -- Analyst

Marlane Pereiro -- Bank of America Merrill Lynch -- Analyst

Kevin McVeigh -- Credit Suisse -- Analyst

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